Nate Reineke (00:13)
Hello, physician moms and dads. I'm Nate Renneke, certified financial planner and primary advisor.
Chelsea Jones (00:20)
Chelsea Jones also a certified financial planner and primary advisor here at Physician Family Financial Advisors.
Nate Reineke (00:27)
Chelsea, we're back with another question asking for a friend. Okay, so we just got through, well, yeah, just got through tax season, unless you filed in an extension. ⁓ So we've gotten a lot of tax questions recently, some of them ⁓ nuanced, some of them were very straightforward. And so we are getting some very straightforward tax questions, and that's what asking for a friend is all about, hoping to.
break down some of the more straightforward questions for people without him having to ask. So the question that we've received, you and I both received a similar question like this, ⁓ are tax deductions and tax credits the same thing?
Chelsea Jones (01:11)
Yeah, it's a great question. Not many people actually know this. They are not the same thing. They're different. So how a tax deduction works is the deduction reduces your taxable income, which in turn reduces the taxes that you pay, but taxable income is lowered with a deduction. A tax credit is like a credit against the amount that you owe. So it directly lowers your tax bill.
Nate Reineke (01:17)
Mm-hmm.
Mm-hmm.
Chelsea Jones (01:40)
So if you get a tax deduction of, you know, the context that this question was asked for me was for 529 contributions. And, you know, some states allow for a tax deduction of contributions for the state income taxes. Some offer a credit. And so deduction would say, you know, you can deduct your contributions up to $10,000 a year for your state income taxes.
Nate Reineke (01:49)
Mm-hmm.
Chelsea Jones (02:08)
And so if you deduct $10,000 and your state income tax is 5%, then you would save 5 % of $10,000, which is what? 50 bucks?
⁓ 500 bucks left off of zero. So that would save you 500 bucks. ⁓ Some other ones will, some other states will give you a tax credit. So they say if you contribute $10,000, you get a $500 credit. So it reduces your, your state tax bill by the amount of the credit.
Nate Reineke (02:19)
500. We're good at math. Yeah.
Mm-hmm.
Yes, so technically dollar for dollar, the tax credit is better. But usually, tax credits aren't nearly as high. Right? you get a, and usually a tax credit is like, for 529 contributions, I think a lot of times they're more like $200. So the tax deductions is what most people talk about, because that's more common. There's some tax credits for having children and things like that.
Chelsea Jones (02:43)
Mm-hmm.
Right.
Mm-hmm.
Nate Reineke (03:07)
on income with all of these things. Sometimes ⁓ you make too much to get the credit. ⁓ The question that I got was, hey, heard I can write off my mortgage interest on my taxes. So will I get all $35,000 in interest that I paid? Will I get it all back? And that is not the case. is not, ⁓ well, that's not exactly how credits work either, but it's also it's a deduction.
So you do get to write off, this is they say write off or deduct, you get to deduct the $35,000. And with this rule for mortgages, it's up to, I think $750,000 on, like if you have a mortgage that is 750,000, you can deduct all of the interest. But if it's a million, you have a million dollar mortgage, you can only deduct up to the $750,000 mark on your mortgage.
Chelsea Jones (04:01)
Yeah. Three, four,
seven. Yeah.
Nate Reineke (04:05)
So the way that that works, money back in your pocket is a little bit more complex. So credits are really straightforward. You get to the end, let's say you owed 10,000 bucks on your tax bill and you have a credit of $500. Well, now you only owe 9,500. It's just straightforward. But with a deduction, it is, let's say you took $35,000 out of your income. So let's say you made 400,000.
And now instead of paying taxes on 400,000, you get to reduce that 400,000 by 35,000. So you're only paying taxes on 365. And hopefully you have other deductions that pile up and it reduces your taxable income even more. But just directly with this example, let's imagine that you have a 40 percent, you pay 40 percent in taxes. So what you do is you take that deduction.
and you would multiply it by 0.4. And so the money coming back to you based on that one deduction would be 14,000. But ⁓ even kind of taking this back even further, this person just assumed they would get the money. And ⁓ I guess, I mean, this is a whole nother asking for a friend question how taxes work, but.
Chelsea Jones (05:12)
Mm-hmm.
Nate Reineke (05:29)
⁓ This all assumes that you would get that $14,000 back if you're exactly even on your withholdings. You have to withhold enough. ⁓ I want to take this opportunity to talk about withholdings. This seems to be a big... ⁓
Chelsea Jones (05:36)
Right.
Nate Reineke (05:47)
point of confusion or just a really painful thing for physicians. They get to the end of the year and if they see they got money back on their taxes, they're happy. Right? And that feels pretty good. Same with you and me. They get to the end of the year. They owe $10,000. They owe $20,000, $30,000. They're sad. They're upset. But the reality is nothing
Chelsea Jones (06:05)
Mm-hmm.
Nate Reineke (06:17)
really changed. mean, it's not that you're paying more in taxes. It's just you didn't withhold enough. Or if you got too big of a return, you withheld too much. And this is solved not by going out and trying to find tax breaks, which would be nice if you could find them, but it's solved by just withholding more money on your paychecks. All right. So you go into work, call HR and you need to adjust your withholdings.
Chelsea Jones (06:25)
Mm-hmm.
Mm-hmm.
Nate Reineke (06:46)
You fill out a W-4 and adjust your withholdings. So let's imagine that in 2025, you had a bill of 12,000 bucks. And then let's imagine in this magical scenario, the tax code doesn't change. And let's also imagine that your situation doesn't change. So you get all the same tax deductions. The tax code did not change one bit.
Nothing changed. had no more children. Nothing happened. Well, that means that you could go to your W-4 and calculate how to withhold an extra $1,000 a month on your paychecks. And then next year, instead of owing $12,000, you will owe zero.
So that ⁓ tends to make people happier despite the fact that it doesn't mean you paid any less or more in taxes. You just were more prepared.
Chelsea Jones (07:41)
Yeah, an adjustment is worth it too if the opposite is true. If you're getting a big fat refund, you probably need to reduce your withholdings.
Nate Reineke (07:47)
Mm-hmm.
I had ⁓ a family this year that got a $60,000 refund. And throughout the year, ⁓ it's difficult to know exactly why people feel like they're tight on money, because physicians make plenty of money. But I was asking them to save quite a bit for their retirement and college. And they're like, man, it's pretty close. We can do it, but ⁓ it feels tight. So OK. ⁓
Chelsea Jones (08:03)
Yeah.
Mm-hmm.
Nate Reineke (08:17)
And then six months later, they realized they got a $60,000 return. And what that really means is they could have brought home an extra $5,000 a month. And all of sudden, it's not so close. So it's important either way. You want to put that $5,000 extra or whatever extra to work, either invest it or spend it. And then alternatively, you don't want to show up to tax time and have to raid your emergency fund if you didn't withhold enough.
Chelsea Jones (08:25)
Mm hmm. Yeah.
Mm-hmm.
Yeah, there's a happy medium to be found, for sure.
Nate Reineke (08:50)
Yeah.
Chelsea Jones (08:51)
Okay.
Nate Reineke (08:51)
Remember
the days when we were working some college job and you always got like a small refund and it felt great. And then so now, or even in residency, it's hard to owe a ton in taxes because your income's just not high enough to owe a big number. And now I see physicians who make $500,000 a year upset maybe if they owe $10,000. And to me, owing $10,000.
Chelsea Jones (08:59)
Mm-hmm.
Like,
that's actually pretty close. Yeah.
Nate Reineke (09:19)
That's really close.
I'm thinking that's like right on. I don't know if I'd make an adjustment ⁓ because it's really close. You can adjust it by six or seven hundred dollars a month, but that's about it.
Chelsea Jones (09:27)
Mm-hmm.
You know, it's so funny this you talking about the withholding reminded me of the first job I ever had, which was, I was a lifeguard for a long time at the water park in my hometown. And I remember I was meeting with someone at city hall to help me get set up because it was owned by the city and whatnot. And they were like, do you want to claim yourself or do you want to put zero? And I was like, what? What's the difference?
Nate Reineke (09:37)
Mm-hmm.
Mm-hmm.
Yeah.
Chelsea Jones (10:01)
She was like,
if you want a bigger refund, put zero. If you want a bigger paycheck, put one. And I was like, one.
Nate Reineke (10:07)
You
Yeah, that's funny.
The person at City Hall giving you tax advice.
Chelsea Jones (10:19)
Yeah. I was like, I'm 16. I don't know what I'm doing.
Nate Reineke (10:21)
All right.
Yeah, my first job was I worked at the front office at my school and then it was the same thing. I got a refund that year. I did the opposite, I think, but ⁓ it's just.
Chelsea Jones (10:35)
Yeah. I mean, I feel
like all teenagers will get a refund because you pay tax, you withhold taxes, but you make less than the standard deduction. Like you're going to get some money back. So it doesn't really matter what you put.
Nate Reineke (10:41)
Yeah.
Exactly.
Exactly.
Chelsea Jones (10:50)
Okay, moving on to our regular questions. Our first one is from a double doctor family from West Virginia. They said, how do we decide whether or not to file separate, married filing separate or married filing joint for student loan payments?
Nate Reineke (11:05)
Yeah, is student loan payments are coming back. know, lot of our listeners are starting to pay them again. There was years where, you know, you're trying to make a decision on what to do with your taxes for student loans, wondering if student loans payments would start again, but they have started. And so this is another ⁓ kind of annual decision that you will need to make. And ⁓ the way to do this is like the really the decision is
Chelsea Jones (11:21)
Mm-hmm.
Nate Reineke (11:32)
is pinned against two things. So if you file separate, usually you will owe more on taxes. It's not as much as you might think most of the time for the average physician family. There's some credits you miss out on, but ultimately, ⁓ if you're taking the standard deduction, ⁓ it's about the same within a few thousand dollars. So no need to pay that extra few thousand dollars, though, if you don't have to.
The question is, do we pay slightly more on our tax bill by filing separate in order to save money on our student loan payments? Because if you're in IBR or if you're lucky enough to be in pay, you can file separate and sometimes that will reduce your payment. And so just for really easy math, might say, let's say our tax bill is going to be an extra $4,000 by filing separate.
but we save $500 a month on our student loans by filing separate. Well, I would rather you should ⁓ pay the $4,000 extra in taxes and save $6,000 on your student loan payments, which nets you a savings throughout the year of 2,000 bucks. Now, ⁓ that's the big picture. In practice, this is a little more difficult because you have to figure out what are the numbers?
Chelsea Jones (12:50)
Mm-hmm.
Right.
Nate Reineke (13:00)
how do I figure out what my payments are? So I'm going to tell you exactly how to do it ⁓ and get as close as you can. But really what needs to happen is the hard part is on the tax side. So for student loans, you go to mystudentaid.gov, you put in all your information, you do a payment calculation, like what will my payment be under ⁓ these different income driven repayment plans. You look at what's your
qualified for either IBR or pay, but let's just say you're qualified for IBR, income-based repayment. And then you put in all your information that says you owe $2,000 a month on your student loans if you do married filing joint. And then you write down $2,000 and you go and there's like a little drop down menu on the side and you switch it to all you have to do. You don't have refill it out anymore. You can just click married filing separate.
it will recalculate and then it says $2,500. Or I'm sorry, if you're married filing separate, it would go down usually. So $1,500. So now you have kind of your starting point. I will save $6,000 a year by filing separate. If there's two doctors in the family and they're both going for public service loan forgiveness, the calculation will be different for each of you. One of you might pay more by filing separate.
which makes sense because it's going based off of your income to your loans. And if you file joint, your spouse's loans calculate into your payment. So if you both have loans, it helps each other to have both loans. But if one of you makes a lot, you know, maybe one of you makes 600,000 and one of you makes 300,000, it's going to be more beneficial to file separate for the person making 300. So, but all told between the two payments or the one, you see how much am going to save?
Then the hard part is tax season comes around, your CPA looks at you and says, of course you want to file jointly. And you say, well, what would the difference be? And you let your CPA tell you, well, you're going to pay an extra however much by filing separate. And then you go back to your notes and you say, well, we need to file separate or joint based on how much money we save. ⁓ In TurboTax, if you're a
Chelsea Jones (15:16)
Mm-hmm.
Nate Reineke (15:20)
If you have a W-2 employee and you're just doing TurboTaxes on your own, sometimes you have to fill this out twice or you have to go back and switch to married filing separately and it can get a little bit complicated because you might have to fill out your tax information twice. But ultimately, this is just a cost savings analysis. like, will my student loans cost more and by how much and am I saving more than that in taxes by filing jointly?
Chelsea Jones (15:44)
Mm-hmm.
Nate Reineke (15:46)
That's it.
Chelsea Jones (15:47)
That's interesting.
Do you, is there like a scenario where it typically works out and it doesn't like the double doc family with both having loans? Is it usually better that in, in practice?
Nate Reineke (16:01)
There is, ⁓ I don't really like getting into that because everyone's situation is so different. really, it's not that, the finding out the student loan payments is not the hard part. I it takes 10 minutes. ⁓ But I will say that normally filing separate makes sense when PSLF makes sense for both people. So PSLF makes sense usually when
Chelsea Jones (16:09)
Yeah.
Mm-hmm.
Mm.
Nate Reineke (16:29)
that your loans are higher than your income definitely makes sense. If your loans are about, let's say you make 300 and your loans are 300, usually PSLF makes sense. The worse that situation gets, meaning let's say you make 500 and your loans are only 100 grand, then the worse the tax implications are too. Basically, the less you save on your student loans. The tax calculation doesn't really change based on your student loans.
Chelsea Jones (16:48)
Mm-hmm.
Nate Reineke (16:57)
⁓ So it's like the more PSLF makes sense, the more filing separate makes sense.
Chelsea Jones (17:02)
Gotcha. Okay.
Interesting. The next question we have is from a gynecologic oncologist in Oregon. They said, how should we set up our high deductible coverage? Should everybody be on one plan or should we split the coverage between our two employers? So this question, like most questions we get is a big, it depends. You know, so some things you want to consider here is
Nate Reineke (17:25)
Mm-hmm.
Chelsea Jones (17:29)
Do you have access to high deductible coverage at both spouses, employers? Do they contribute to an HSA on your behalf? If you sign up for it, ⁓ do they pay for all of your premium being the employee there? ⁓ Cause if, I mean, if all of those are yes, then it may make sense to like have one person on, you know, each spouse on their own coverage. that way the employee pay, the employer pays the bulk of the premium.
Nate Reineke (17:43)
Yeah.
Chelsea Jones (17:58)
They'll give you a thousand bucks for an HSA contribution or something.
Nate Reineke (18:02)
Because sometimes
the employer will contribute to your HSA for you. So if, if let's say, ⁓ mom has, a HSA eligible plan and work pays her premiums and then, ⁓ dad has an HSA eligible plan, work doesn't pay his premiums, but they contribute a thousand dollars a year to his HSA. Well, that's a free thousand bucks.
Chelsea Jones (18:06)
That's right.
Mm-hmm.
Mm-hmm.
Nate Reineke (18:31)
So it's basically premiums, cost, and how much, assuming they both have HSA eligible plans, the cost of premiums and ⁓ how much your work's contributing to that HSA. Yep. ⁓
Chelsea Jones (18:46)
Yeah. Yeah. And they have
kids too. So as long as you have one other person on your plan, you're eligible for the family amount. Um, but with both being on high deductible coverage, um, that that's one of those things where the family amount applies, even though you both have individual coverage. And it's really annoying because the family amount is $50 short of being double what the individual amount is.
Nate Reineke (19:13)
Mm-hmm.
Chelsea Jones (19:14)
And so if you do split it, you have to be careful not to over-contribute by 50 bucks.
Nate Reineke (19:18)
Yeah, or even more, ⁓ you know, that your employer contributions counts towards the max. And I ran into this, I think we answered this part of like similar question a couple of episodes ago. But basically, there's a family max and employer contributions, individual contributions, let's say on dad's side in this scenario, and family contributions on mom's side that all goes toward one limit. So you're going to try to edge out like
Chelsea Jones (19:25)
That's right.
Similar question, yeah.
Nate Reineke (19:47)
your premium costs. You're going to try to edge out getting a few hundred dollars from your employer. And you do need to do some math because ⁓ ultimately it's a headache. Like you accidentally over-contribute by $500 and it's a paperwork headache to get the money out.
Chelsea Jones (19:57)
Mm-hmm.
Yeah.
Yeah.
Nate Reineke (20:04)
one limit on HSAs.
Chelsea Jones (20:07)
one limit.
Okay. And then our final question we have here is from an orthopedic surgeon in New York. They said, my hospital just started offering a mega backdoor Roth option through our 401k. I'm already in the 37 % bracket. Does it actually make sense to put post-tax money into a Roth IRA right now? Into a Roth. Sorry, not an IRA. Or should I just stick to my taxable brokerage account for the liquidity?
Nate Reineke (20:35)
Mm-hmm.
Chelsea Jones (20:36)
So this is a great question. mean...
Nate Reineke (20:37)
It's a really
good question. This is a nuanced question. It's not just talking about the taxes, it's talking about the other benefits of a brokerage account.
Chelsea Jones (20:45)
Mm-hmm
Yeah, which is liquidity like they said which most people don't think about they're like Shouldn't I just let my money grow tax-free usually have the opposite of this question. Like why wouldn't I put money into a Roth? So they're coming at it from a good angle they have an understanding of the benefits of both and In this case, I mean, I think there are factors that it depends right but
Nate Reineke (20:49)
Mm-hmm.
Exactly. Yep.
Chelsea Jones (21:14)
When we're talking about just contributions, post-tax contributions, when it's the taxable account versus the Roth account, the Roth account wins in terms of tax-free growth, right? Because the taxable account, you put money in post-tax, the gains are subject to capital gains rates, which 20, 23.8 % at most right now. So I'd rather pay 0 % in taxes than 23.8%.
Nate Reineke (21:28)
Mm-hmm.
Chelsea Jones (21:43)
But what you're giving up with putting money into the Roth is that liquidity that they're talking about. So it's in a qualified account in the Roth and you can't take it out without penalties until after age 59 and a half ⁓ for the Roth 401k. ⁓
Nate Reineke (21:55)
Mm-hmm.
Yeah.
You know, I have a that's exactly right. So there the tax benefits are better, obviously in Roth. ⁓ But the reason they're better is because you lost something and you lost liquidity. And I think this is really easy from a financial planner's perspective to just say, what's better with her taxes? And it just doesn't capture the full picture of your life. Your life sometimes requires a big
Chelsea Jones (22:09)
Mm-hmm.
Mm-hmm.
Nate Reineke (22:29)
pile of money. Right? Like I have people that, you know, they were saving because they had extra money and this family wanted to buy a house and it was like seven years later after they had written their plan and obviously they want to put money in tax-efficient vehicles. And so they had a brokerage account. They didn't necessarily require it to be on track for retirement. But man, was it nice that they were putting in $1,500 a month into that account.
Chelsea Jones (22:31)
Yeah.
Nate Reineke (22:59)
and seven years later after a whole bunch of growth, they got to take out 20 % down on a new build on their house and keep their home so they didn't have to sell their house, which is another illiquid asset on your balance sheet, they didn't have to sell their house to get to the money or take out a heat lock. It is very freeing to have money you can have access to. All of a sudden, you don't need a massive
Chelsea Jones (23:14)
Mm.
Mm-hmm.
Nate Reineke (23:28)
overfunded emergency fund all the time because while you don't want to use that taxable account for emergency, it's nice to see a couple hundred thousand dollars in there that is there if you need it. So ⁓ the trade off, don't believe is worth it necessarily, like one to one trade off. I'm going to tell someone to put money in the mega backdoor Roth. But if you're in the 37 percent tax bracket, you're reasonable with your money.
Chelsea Jones (23:32)
Mm-hmm.
Mm-hmm.
Mm-hmm.
Nate Reineke (23:57)
I think you can get away with doing both. One to one, of course, take the Roth, take the benefit. ⁓ But when you're looking at investing money, you should really consider the things that flexibility buys you, which is those more aspirational goals. Buying a house, a few episodes to talk about buying a boat. Maybe you're never going to do those things, but if you ever want to and you want to do it in a responsible way, you're to have some money.
Chelsea Jones (24:16)
Mm-hmm.
Mm-hmm. Yeah.
Nate Reineke (24:26)
that's available to you.
Chelsea Jones (24:26)
Yeah. Or
retiring earlier, like in your fifties or scaling back and being able to support goals. If you were to scale back and make less taxable accounts, give you a lot of flexibility covering college beyond what the five to nine did. If you know that your kids went to grad school.
Nate Reineke (24:30)
retiring earlier. Yes.
It's very nice. I think I had a family that was going through like a little bit of an emergency with their family and they wanted to stop saving for college, slow down savings for college or there was a lot of things that they're like, what are we gonna do? If this happens, then what's gonna happen? And every time they had a problem, it was like, what if this level of savings doesn't cover college? I'm like, well, good thing you have half a million dollars in a brokerage account.
Chelsea Jones (24:47)
Mm-hmm.
⁓
Yeah, yeah, the client to who, yeah.
Nate Reineke (25:17)
And then like, what if we need to move? Like, it's just all
these, and you're like, you have the money right there. And of course, we want that for an early retirement. But if that doesn't work out, it's there.
Chelsea Jones (25:25)
Yeah.
Yeah. What if I need money for a buy-in? I had a client who had the opportunity to buy in and they just, they were able to pull it out of their brokerage account and with the distributions that they got from being an owner and buying in, they were able to put the money back pretty quickly. So.
Nate Reineke (25:31)
Yeah.
Yeah.
And you got to pay taxes and all that and that's just part of it, right? You got all that growth, you got to pay taxes on it. But ⁓ that liquidity is something that is, ⁓ we throw it out as like this investment word. Certain things have liquidity. It's just one of those things that we talk about. Nobody really values it like I have seen in physicians' lives. Having that money there has brought a lot of flexibility to people's lives.
Chelsea Jones (25:49)
Mm-hmm.
Mm-hmm.
Yeah, I was going to say liquidity really just means flexibility.
Nate Reineke (26:16)
Yes. Yep.
Okay, thank you everyone for listening. If you liked this episode, please be sure to subscribe so you don't miss a new release every Wednesday. You can leave us a rating wherever you're listening. And if you'd like to work with us, you can visit physicianfamily.com to schedule an interview. If you aren't ready for that, please send us your questions. Podcast at physicianfamily.com. We'll answer your questions even if it doesn't make it on the episode. Until next time, remember, you're not just making a living.
you're making a life.
